I have lately been hearing of people having a hard time trading and struggling to make money trading. All I can recommend to them is that you look long and hard at your strategy, and analyse where things are going wrong.
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Basically - where are the losses coming from? Are some of your shares going up, but gains from them are being wiped out from other shares declining?
If so, why are you holding on to those declining shares? Is it because you are truly confident that they will soon reverse and go up?
If this is the case, what are your reasons for this confidence? Surely you bought the particular share in the first place because you expected it to rise? (If, BTW, the answer to that question is anything but 'yes', you should not be a trader or investor!)
If it is doing the opposite to what you expected, does that not indicate that your original judgment was wrong? And that maybe your belief that the share is about to start going up, despite your previous belief being demonstrably wrong, is based on not a lot more than wishful thinking? And if that is the case, is it not best simply to acknowledge that fact, cut your loss as quickly as possible, and move on?
A lot of people, as I have remarked previously, fall in love with their shares. I, on the other hand, prefer to have (usually) brief affairs with my shares. I love them only when they are going UP. I have no interest whatsoever in holding a share that is losing me money, and when it starts doing that, will discard it ruthlessly without a second thought. I am quite happy to resume my "fling" with it if and when it starts rising again, but have no interest in it when it is heading south.
Self-knowledge is, IMO, a terribly underrated quality in trading. A lot of traders live in a fantasy world where they gloat and boast about their winners yet keep remarkably quiet about their losers. Fair enough, I guess - the trouble is, if they also kid themselves that they are great traders, when they are anything but, they will never do that vital thing that every trader needs to do - to LEARN.
It's the duff trades that we learn from, not the winning ones. Fortunately, for those of us who live in the real world, there is no shortage of the former ;-)
For instance, if I can be confident about anything in trading, it is that, out of every 10 trades I open, I will be lucky if I don't lose on more than three of them.
And I accept that. It is, literally, impossible to get 100% of one's trades right - in that awkward, uncomfortable place known as the real world, that is. Accepting that you will lose on a proportion of them is nothing more than facing the facts.
The one thing that every trader can control, however, is how much they lose on the duff trades.
On the one hand, they can live in that aforementioned fantasy world. They can pretend that 'you haven't lost on a trade until you've sold'. It's funny, though, how often those self-same people boast about how well they're doing on a share when it's still an open position - surely, by the same token, you haven't won on a trade until you've sold, either?
Or they can buy without planning on a stop loss. Or, if the stop loss is breached, say 'well, it can't go down much more - I've lost a lot already, so what the hell, let's hang on in there; it's bound to turn round soon'.
Of course, it sometimes does. Very bad for the trader's character, that. Because they then conclude that, because the trade came good that time, all trades will eventually come good. But the stockmarket is littered with examples of shares that never came good.
Often, IMO, people ignore their stop losses because they were set too far below the purchase price. If you have already lost (say) 20% on a trade, the temptation is always bound to be great to risk losing a "little" bit more. Trouble is, it can often be a lot more.
The answer, in my view, is to use tighter stop losses. Admittedly, this policy has its own drawbacks - principally, that one can be knocked out of a position too easily. I know, because it happens to me on a regular basis! But my answer is, if the share starts rising again, to jump back in. OK, I have to pay spread, stamp and dealing costs again. Big deal, say I. Compared with the person who has, for instance, lost 20+pts on VLK (oops!), that is pretty small beer.
And just occasionally, I do even manage to buy back at substantially lower prices. That happened a lot last summer, for instance ;-)
Every strategy has its flaws. Ultimately, however, the only true measure of a trader's success is whether he or she makes a successful rate of return over weeks, months and years; and in bad market conditions as well as good.
There is really no other measure that is worth considering. Just as it is, IMO, nonsense to describe a share as 'a good 'un" if it is heading remorselessly downwards (unless, of course, one is short of it!), you cannot be a "good trader" unless you have some idea of what you are doing, have clear goals for what you expect to achieve from trading, and can achieve those goals on a regular basis. This also means that you should never overpay for a stock or get sukered in by the hype.
Out of my stock broking days I could name various strategies and investment methods that seemed to work/end in disaster, but the thing that struck me the most was that it was always the people dealing in absolute rubbish that got wiped out, for example (and I understand that VOG have been bouncing of late - not that it's the kind of thing I would even look at), I used to deal for a client who traded VOG religiously -- and in a big way. He amassed profits somewhere in the region of £30k in a year, before being completely wiped out. At one point he was up £12k on a single position and refused to take the profit - we all know what occurred the following day, and he continued to "average down" at every opportunity. Then he was no more. Perfectly summed-up how not to trade. So, I've always maintained that if you are going to trade, you must only trade in stocks that are fundamentally sound; and that you are in a position to hold them for months - otherwise you're either going to have to be extremely lucky.
Being a good trader has absolutely nothing to do with reading things in to charts that are simply not there; ramping one's shares in a (usually) vain attempt to make them rise; mindlessly following others' 'tips', whether in tipsheets, on bulletin boards or wherever; ignoring stop losses; selling one's winners too soon; letting one's losers deplete one's capital; or any of the myriad errors that all of us are prone to at least some of the time.
Rather, it derives from a disciplined approach; independence of mind; good judgement; good instinct; self-knowledge; decisiveness; and a few other things I have probably forgotten about because I'm tired after a busy trading day and getting hungry ;-)
The Gambler (Don Schlitz)
On a warm summer's evenin' on a train bound for nowhere,
I met up with the gambler; we were both too tired to sleep.
So we took turns a starin' out the window at the darkness
'Til boredom overtook us, and he began to speak.
He said, "Son, I've made a life out of readin' people's faces,
And knowin' what their cards were by the way they held their eyes.
And if you don't mind my sayin', I can see you're out of aces.
For a taste of your whiskey I'll give you some advice."
So I handed him my bottle and he drank down my last swallow.
Then he bummed a cigarette and asked me for a light.
And the night got deathly quiet, and his face lost all expression.
Said, "If you're gonna play the game, boy, ya gotta learn to play it right.
You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.
Ev'ry gambler knows that the secret to survivin'
Is knowin' what to throw away and knowing what to keep.
'Cause ev'ry hand's a winner and ev'ry hand's a loser,
And the best that you can hope for is to die in your sleep."
And when he'd finished speakin', he turned back towards the window,
Crushed out his cigarette and faded off to sleep.
And somewhere in the darkness the gambler, he broke even.
But in his final words I found an ace that I could keep.
You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.
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